My instinct a few months ago would have been to avoid Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), and I would have been foolish in the short-term. However, I still remain uncertain about the long-term outlook for the company.
Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s price recovery raises expectations. The company can be profitable without significant growth–that means that the company can stay in business, but might not be able to keep the price rising. The Starbucks Corporation (NASDAQ:SBUX) news provides the most important piece of the puzzle.
Partnership between rivals?
Starbucks Corporation (NASDAQ:SBUX) and Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) have renewed their partnership to offer Starbucks Corporation (NASDAQ:SBUX) coffee in Keurig machines with single serve K-cups. Starbucks Corporation (NASDAQ:SBUX) has entered the single-serve market itself with its Verismo machines, which are not compatible with K-cups.
A lot of people own Keurig machines, and the switch to Verismo is not going to happen very fast. Starbucks Corporation (NASDAQ:SBUX) has a substantial fan base that bought Keurig machines over the years. The deal goes beyond extending the status quo. Starbucks Corporation (NASDAQ:SBUX) will be adding Seattle’s Best and Teavana K-cups. The Verismo seems targeted at Starbucks fans, as most of the marketing appears in the stores and on the Starbucks.com website. The marketing for Keurig is more extensive.
Enter Rubi
Seattle’s Best will also be coming to a few square feet near you in the form of the Coinstar, Inc. (NASDAQ:CSTR) Rubi machines. I still have yet to find a machine to try, but I eagerly await the chance. Coinstar, Inc. (NASDAQ:CSTR) is an extremely innovative company, and it is frequently underestimated. The coin machines are now integrated with PayPal, allowing you to add and request money from your Paypal account at the machine.
The Rubi looks impressive, and is seeing significant traffic at the locations in which it has been installed. It should provide an additional revenue stream for Starbucks in the Seattle’s Best brand, especially after the shutdown of Borders.
The final thing for Coinstar are its beauty product kiosks, which have massive potential. These machines dispense samples of beauty products for $1 so that consumers can try out a product. This leads to a lot of opportunities to partner with companies coming out with new beauty products.
Starbucks is the only choice
Starbucks wants its taste to get to the most consumers and keep them loyal via any product channel. Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) is becoming entirely about the single-serve cups. Traditional coffee is fading away. The shift works for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), for now, because it has lower associated costs to make the single-serve cups. The deal with Starbucks is for five years. In the mean time, Verismo could be the replacement machine of choice when Keurig machines break down. Starbucks could make a real push into winning the coffee machine market. The switch to the single-serve business is a good thing for Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)’s numbers, but it offers less diversity in operations if single-serve hits difficulty.
Green Mountain came in on the bottom of its expected 14%-18% growth in revenue, at just 14%. The company completely crushed it on earnings, but revenue was not so great in light of expectations. I am not one to care too much about analyst expectations, and it amounted to a miss of $20 million on revenue. I think it is more worrying that the company came at the bottom of its own range.
Beating on earnings is great and gross margins increased due to a more favorable coffee environment, but favorable coffee prices are a short-term situation. Lots of things can happen to the coffee crop, and the benefits in margin are not solely the function of lean, mean operations. With that in mind, the problem of revenues rises to the fore. Third quarter revenue guidance came in below analyst expectations.
Conclusion
The deal with Starbucks is great news for Green Mountain and Starbucks. For the next five years, Keurig owners can enjoy Starbucks coffee, and now will have Seattle’s Best and Teavana choices. Starbucks is not abandoning its own single-serve ambitions, for now, and is simply being omnipresent. Coinstar is a part of this as well, and the company has been innovating new kiosks to compliment its successful Redbox and coin kiosks. I like Starbucks and Coinstar for their overall strategies, and Starbucks plans to expand its product offerings abroad. The long-term outlook for Green Mountain concerns me, and the recent rise makes me think that it is best to avoid the stock.
Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Green Mountain Coffee Roasters and Starbucks. The Motley Fool owns shares of Starbucks. Nihar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article More than Enough Coffee to Go Around originally appeared on Fool.com.
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